2025 (7) TMI 50 - HC - Income Tax

Estimation of income - Bogus purchases - Tribunal partly allowed the appeal of the assessee and restricted the addition made by the Assessment Officer of 100% to 6% - HELD THAT - As decided in Pankaj K. Choudhary 2023 (3) TMI 1402 - GUJARAT HIGH COURT partly allowed the appeal of the Revenue wherein it was held that in respect of bogus purchases the addition at the rate of 6% of bogus purchases is fair and reasonable. Thus the substantial questions of law proposed by the appellant in this appeal stands already answered and therefore no question of law much less any substantial question of law can be said to have arisen.

Summary

The core legal questions considered by the Court in this tax appeal under Section 260A of the Income Tax Act, 1961, arising from the Tribunal's order for Assessment Year 2012-2013, were:

a) Whether the Tribunal was justified in deleting the addition of 100% of alleged bogus purchases amounting to Rs. 116,49,88,059/-, which were claimed to be sham transactions involving accommodation entries from entities linked to the Bhanwarlal Jain Group.

b) Whether the Tribunal was correct in dismissing the Revenue's appeal on the ground that no substantial question of law arose.

c) Whether the Tribunal erred in not treating payments to hawala dealers, evidenced by bogus purchase bills, as suppression of profits liable to be added to the assessee's income.

d) Whether the Tribunal failed to consider relevant judicial precedents, including:

• The Gujarat High Court judgment in N.K. Industries Ltd restricting addition to 25% and its conflict with principles under Sections 68 and 69C of the Act.
• The Calcutta High Court decision in PCIT vs. Premlata Tekriwal, which held that entire bogus expenditure should be added to income.
• The Supreme Court's ruling in N.K. Proteins v. Dy. CIT affirming addition of unexplained/bogus expenditure.

e) Whether the Tribunal was justified in dismissing the Revenue's appeal despite the Assessing Officer's 100% addition based on information from DIT(Inv)-II, Mumbai, and the assessee's failure to prove genuineness of transactions.

Regarding the first issue of the 100% addition for bogus purchases, the Court noted that the Assessing Officer had initially made a full addition of Rs. 116.49 crores, treating the purchases as fabricated through accommodation entries. The CIT (Appeals) upheld this addition, but the Tribunal reduced it drastically to 6% of the disputed purchases. The Tribunal's reasoning was grounded in the assessee's declared gross profit (GP) and net profit margins, which were extremely low (GP at 0.78% and net profit at 0.02%).

The Court referred to a Coordinate Bench judgment in Principal Commissioner of Income Tax vs. Pankaj K. Choudhary, which held that taxing the entire amount of bogus purchases is not justified; rather, only the income component derived from such transactions should be added to prevent revenue leakage. The Coordinate Bench had reduced the disallowance to 6% or 12.5% depending on the GP rate, reasoning that the disallowance should be proportionate to the benefit derived by the assessee. This principle was applied by the Tribunal in the present case.

On the question of whether the Tribunal was correct in dismissing the Revenue's appeal for lack of substantial question of law, the Court observed that the issue was no longer res-integra. The Coordinate Bench had already laid down the legal position regarding the extent of disallowance in cases involving accommodation entries and bogus purchases. The Court emphasized that the Tribunal had considered the facts and evidence before it, including the assessee's financials and the nature of transactions, and had applied the law consistently with judicial precedents.

Regarding the treatment of payments to hawala dealers and suppression of profits, the Court noted that the Tribunal had implicitly considered these aspects by analyzing the profit margins and the genuineness of the transactions. The Tribunal's reduction of the addition to 6% reflected its conclusion that the entire amount was not to be treated as income but only the estimated benefit derived. The Court did not find error in this approach.

On the issue of the Tribunal's alleged failure to consider relevant precedents, the Court examined the cited judgments:

• The Gujarat High Court's decision in N.K. Industries Ltd was discussed in the Coordinate Bench ruling, which had refined the approach to disallowance percentages.
• The Calcutta High Court's decision in PCIT vs. Premlata Tekriwal and the Supreme Court's ruling in N.K. Proteins were acknowledged, but the Court noted that the present case's facts and financial indicators warranted a proportionate disallowance rather than a blanket 100% addition.

The Court found that the Tribunal had adequately considered these precedents in its reasoning.

Concerning the Assessing Officer's reliance on information from DIT(Inv)-II, Mumbai, and the assessee's failure to discharge its burden of proof, the Court found that the Tribunal had duly weighed the evidence. The Tribunal noted the absence of stock or material during search actions against the Bhanwarlal Jain Group and the commission income declared by the group, but also took into account the low profit margins declared by the assessee. The Tribunal's conclusion that a 6% addition sufficed to meet the ends of justice was based on this comprehensive factual matrix.

The Court also referred to another Coordinate Bench decision in Principal Commissioner of Income Tax vs. M/s. Surya Impex involving the same group and similar facts, where the Court had ruled in favor of the assessee, reinforcing the consistency of the approach.

In conclusion, the Court held that the substantial questions of law raised by the Revenue were already answered by binding precedents and the Tribunal's detailed analysis of facts and law. The Court found no merit in the appeal and dismissed it summarily.

Key holdings include:

"It is settled law that under Income-tax, the tax authorities are not entitled to tax the entire transaction, but only the income component of the disputed transaction, to prevent the possibility of revenue leakage."

"Considering overall facts and circumstances of the present case, we are of the view that disallowances @ 6% of impugned purchases / disputed purchases would be sufficient to meet the possibility of revenue leakage."

"No question of law much less any substantial question of law arises in the facts of the present case."

The Court thus established the principle that in cases of bogus purchases/accommodation entries, the addition to income should be proportionate to the benefit derived, measured by profit margins, rather than a blanket 100% addition. This approach balances the prevention of tax evasion with fairness to the assessee, aligning with precedent and statutory interpretation of Sections 68 and 69C of the Income Tax Act.